I feel so blessed that I have so many really smart, really great friends. In the hope that one day I might understand the equity markets so I can more confidently invest in them, I called a handful of friends that manage equity funds to talk to them about whether or not equities are cheap? First of all, they all hate that question. Since all equity managers are long (own stocks) they always believe they hold companies that have tremendous value that is yet to be realized. After I apologized for asking them that question, I asked it in a different way. “Today, are you finding that there is much more value to be realized in the companies that you own? How long has it been since you have found so much value at current prices? The short answer is, not for a long time. Three very smart, very successful managers say that they cannot believe how cheap they are buying their companies. “Even in a recession scenario? Even with substantial revisions to earnings” I ask? They still respond confidently. I like that. Honestly I am still very afraid of buying indexes right here, but the time might well be right to give money to very good managers in search of that ever elusive alpha.
How could I not respond to the latest announcement given I was once a mortgage backed bond trader??? Hope you enjoy the read.
For a a thoughtful explanation of the current situation you have to read the thoughtful piece by George Soros.
Here is the link http://www.ft.com/cms/s/0/24f73610-c91e-11dc-9807-000077b07658.html
A few excerpts from that piece worth highlighting
“The current financial crisis was precipitated by a bubble in the US housing market. In some ways it resembles other crises that have occurred since the end of the second world war at intervals ranging from four to 10 years.
However, there is a profound difference: the current crisis marks the end of an era of credit expansion based on the dollar as the international reserve currency. The periodic crises were part of a larger boom-bust process. The current crisis is the culmination of a super-boom that has lasted for more than 60 years.”
Please see the whole piece for further elaboration….
Let’s say it again….
“The END of the CREDIT EXPANSION on the dollar as the International Reserve Currency.”
This is where the future differs from the past. The credit unwind will not be pretty, and has already resulted in realized losses at major financial institutions in excess of $100 billion. This is far from over. Though fed rate cuts help, the problem still remains. Many. Many. Many institutions have ugly balance sheets and the need to bring in capital to fix them is massive. Again, we have only seen the beginning of this. Quick fixes will help but not solve anything. This unwind will have to run it’s course. Talk will soon shift dramatically to the monoline insurers – which I understand to be the folks that effectively wrap guarantees around all sorts of assets. They started out in the muni business, a good business, but got pulled in to wrapping ever other asset that ended up being securitized thanks to fancy financial engineering.
The problem is so complex that FED rate cuts and a stimulus package is only a a baby step towards the sophisticated thinking that needs to happen to help to get us out of this mess. Let’s hope that the powers that be pull in the most brilliant minds in the financial world to help come up with long term, sustainable solutions.